On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint

• Authors: Luca Gambetti, Jordi Galí and Davide Debortoli.
• BSE Working Paper: 1013 | January 18
• Keywords: liquidity trap , unconventional monetary policies , regime changes , time-varying structural vector-autoregressive models
• JEL codes: E44, E52
• liquidity trap
• unconventional monetary policies
• regime changes
• time-varying structural vector-autoregressive models

We evaluate the hypothesis that the zero lower bound (ZLB) constraint was, in practice, irrelevant during the recent ZLB episode experienced by the U.S. economy (2009Q1-2015Q4). We focus on two dimensions of economic performance that were ex-ante likely to have been affected by a binding ZLB: (i) the volatility of macro variables and (ii) the economy’s response to shocks. Using a variety of empirical methods, we find little evidence against the irrelevance hypothesis, with our estimates suggesting that the responses of output, inflation and the long-term interest rate were hardly affected by the binding ZLB constraint. We show how a shadow interest rate rule (which we take as a proxy for forward guidance) can reconcile our empirical findings with the predictions of a simple New Keynesian model with a ZLB constraint.